SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the second quarter ended October 30, 1999 Commission File Number 1-7923
Handleman Company
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1242806
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 KIRTS BOULEVARD TROY, MICHIGAN 48084-4142 Area Code 248 362-4400
- ---------------------------------- ---------- ----------------------
(Address of principal (Zip code) (Registrant's telephone
executive offices) number)
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
YES X NO
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS DATE SHARES OUTSTANDING
- ----------------------------- ------------------- -----------------------
Common Stock - $.01 Par Value December 3, 1999 29,107,997
HANDLEMAN COMPANY
INDEX
PAGE NUMBER
-------------
PART I - FINANCIAL INFORMATION
Consolidated Statement of Operations.......................... 1
Consolidated Balance Sheet.................................... 2
Consolidated Statement of Shareholders' Equity................ 3
Consolidated Statement of Cash Flows.......................... 4
Notes to Consolidated Financial Statements.................... 5 - 8
Management's Discussion and Analysis of Operations............ 9 - 13
PART II - OTHER INFORMATION AND SIGNATURES........................... 14
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(amounts in thousands except per share data)
Three Months (13 Weeks) Ended Six Months (26 Weeks) Ended
-------------------------------------- ------------------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
--------------- ------------ ------------- -------------
Revenues $288,855 $289,565 $515,212 $511,442
Costs and expenses:
Direct product costs 213,071 217,529 382,279 386,094
Selling, general and
administrative expenses 51,465 50,961 106,423 106,814
Interest expense, net 832 2,563 1,337 4,916
Repositioning and related charges -- 6,962 -- 116,962
Gain on sale of subsidiary -- -- -- (31,000)
-------- -------- -------- --------
Income (loss) before income
taxes and minority interest 23,487 11,550 25,173 (72,344)
Income tax (expense) benefit (9,396) (4,640) (10,203) 20,357
Minority interest (612) (825) (810) (966)
-------- -------- -------- --------
Net income (loss) $ 13,479 $ 6,085 $ 14,160 ($ 52,953)
======== ======== ======== ========
Net income (loss) per share :
Basic $ 0.45 $ 0.19 $ 0.47 ($ 1.67)
======== ======== ======== ========
Diluted $ 0.45 $ 0.19 $ 0.46 ($ 1.67)
======== ======== ======== ========
Weighted average number of shares
outstanding during the period:
Basic 29,851 31,583 30,278 31,695
======== ======== ======== ========
Diluted 30,189 31,671 30,592 31,853
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
1
HANDLEMAN COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(amounts in thousands except share data)
October 30, May 1,
1999 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 703 $ 27,405
Accounts receivable, less allowance of $15,632 at
October 30, 1999 and $13,760 at May 1, 1999, respectively,
for the gross profit impact of estimated future returns 267,411 217,968
Merchandise inventories 140,446 102,589
Other current assets 23,632 21,560
-------- --------
Total current assets 432,192 369,522
-------- --------
Property and equipment:
Land 3,082 3,354
Buildings and improvements 18,130 16,227
Display fixtures 47,874 45,486
Equipment, furniture and other 49,479 43,830
-------- --------
118,565 108,897
Less accumulated depreciation and amortization 62,554 55,478
-------- --------
56,011 53,419
-------- --------
Other assets, net 82,141 64,915
-------- --------
Total assets $570,344 $487,856
======== ========
LIABILITIES
Current liabilities:
Accounts payable $239,090 $156,300
Debt, current portion 18,571 18,571
Accrued and other liabilities 46,820 41,930
-------- --------
Total current liabilities 304,481 216,801
-------- --------
Debt, non-current 45,357 39,857
Other liabilities 4,934 5,512
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value; 1,000,000 shares
authorized; none issued -- --
Common stock, $.01 par value; 60,000,000 shares
authorized; 29,284,000 and 31,049,000 shares
issued at October 30, 1999 and May 1, 1999, respectively 293 310
Paid-in capital -- 6,828
Foreign currency translation adjustment (6,175) (5,220)
Unearned compensation (1,030) (1,557)
Retained earnings 222,484 225,325
-------- --------
Total shareholders' equity 215,572 225,686
-------- --------
Total liabilities and shareholders' equity $570,344 $487,856
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
2
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(amounts in thousands)
Six Months (26 Weeks) Ended October 30, 1999
--------------------------------------------------------------------------------------------
Common Stock
------------------------- Foreign
Currency Total
Shares Paid-in Translation Unearned Retained Shareholders'
Issued Amount Capital Adjustment Compensation Earnings Equity
---------- --------- --------- ------------- ------------ ---------- --------------
May 1, 1999 31,049 $310 $6,828 ($5,220) ($1,557) $225,325 $225,686
Net income 14,160 14,160
Adjustment for foreign
currency translation (955) (955)
--------
Comprehensive income, net of tax 13,205
--------
Common stock issuances, net
of forfeitures, in connection
with employee benefit plans 169 2 1,458 527 1,987
Common stock repurchased (1,934) (19) (8,286) (17,001) (25,306)
------ ---- ------ ------ ------ -------- --------
October 30, 1999 29,284 $293 $ 0 ($6,175) ($1,030) $222,484 $215,572
====== ==== ====== ====== ====== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
3
HANDLEMAN COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
Six Months (26 Weeks) Ended
-----------------------------------------
October 30, October 31,
1999 1998
------------- -------------
Cash flows from operating activities:
Net income (loss) $14,160 ($ 52,953)
------- ---------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 7,521 8,970
Amortization of acquisition costs 1,704 1,663
Recoupment of license advances 4,106 4,241
Repositioning charge -- 110,000
Gain on sale of subsidiary -- (31,000)
Loss on sale of book business -- 1,291
Increase in operating assets (89,992) (52,826)
Increase in operating liabilities 87,102 11,236
------- ---------
Total adjustments 10,441 53,575
------- ---------
Net cash provided from operating activities 24,601 622
------- ---------
Cash flows from investing activities:
Additions to property and equipment (10,985) (8,862)
Retirements of property and equipment 871 933
License advances and acquired rights (22,415) (8,673)
Cash investment in The itsy bitsy
Entertainment Company, Inc. -- (4,754)
Proceeds from sale of book business and other -- 2,665
------- ---------
Net cash used by investing activities (32,529) (18,691)
------- ---------
Cash flows from financing activities:
Issuances of debt 211,707 1,457,675
Repayments of debt (206,207) (1,441,455)
Repurchase of common stock (25,306) (9,783)
Other changes in shareholders' equity, net 1,032 (6,719)
------- ---------
Net cash used by financing activities (18,774) (282)
------- ---------
Net decrease in cash and cash equivalents (26,702) (18,351)
Cash and cash equivalents at beginning of period 27,405 25,562
------- ---------
Cash and cash equivalents at end of period $ 703 $ 7,211
======= =========
The accompanying notes are an integral part of the consolidated
financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying consolidated balance sheet
and consolidated statements of operations, shareholders' equity and cash
flows contain all adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial position of the
Company as of October 30, 1999, and the results of operations and changes in
cash flows for the six months then ended. Because of the seasonal nature of
the Company's business, sales and earnings results for the six months ended
October 30, 1999 are not necessarily indicative of what the results will be
for the full year. The consolidated balance sheet as of May 1, 1999 included
in this Form 10-Q was derived from the audited consolidated financial
statements of the Company included in the Company's 1999 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. Reference
should be made to the Company's Form 10-K for the year ended May 1, 1999.
2. On June 2, 1998, the Company's Board of Directors approved a comprehensive
strategic repositioning program designed to focus the Company on its core
music distribution business. The repositioning program resulted in a $110
million charge to earnings in the first quarter of fiscal 1999, representing
asset adjustments and cost accruals directly related to the repositioning
program, other than those costs actually incurred and charged to earnings in
fiscal 1998 and certain costs that were required to be expensed as incurred
in the last three quarters of fiscal 1999. The operational repositioning
activities, including employee severance programs, were all completed during
fiscal 1999. Reference should be made to the Company's Form 10-K for the
year ended May 1, 1999 for additional discussion regarding repositioning and
related charges.
In connection with the repositioning program announced on June 2, 1998, the
Board of Directors approved a common stock repurchase program. During fiscal
2000, the Company purchased 2,115,000 shares at a cost of $28.0 million
under the repurchase program. Since the inception of this program through
the date the program expired on December 4, 1999, the Company
repurchased 3,857,000 shares at a cost of $49.0 million.
3. At each balance sheet date, management evaluates the carrying value and
remaining estimated lives of long-lived assets, including intangible assets,
for potential impairment by considering several factors, including
management's plans for future operations, recent operating results,
undiscounted annual cash flows, market trends and other economic factors
relating to the operation to which the assets apply.
5
Notes to Consolidated Financial Statements (continued)
4. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This Statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. This statement will
be adopted in fiscal 2001. The Company does not believe the impact of SFAS
133 on reported earnings and financial position will be material.
5. In fiscal 1999, the Company adopted SFAS 131. In prior years the Company had
determined, using the industry segment approach, that it operated
principally in one business segment: selling music, video, book and personal
computer software products primarily to mass merchants. The Company has
determined, using the management approach, that it operates in two business
segments: Handleman Entertainment Resources (H.E.R.) is responsible for
music category management and distribution operations, and North Coast
Entertainment (NCE) is responsible for the Company's proprietary operations,
which include music, video and licensing operations. Handleman International
(music category management and distribution operations in Mexico and
Brazil), which was reported as a separate segment for fiscal 1999, has been
included within H.E.R. for both this year and last year due to a change in
H.E.R.'s responsibility for the segment effective at the beginning of fiscal
2000.
The tables below present information about reported segments for the three
months ended October 30, 1999 and October 31, 1998 (in thousands of
dollars):
Three Months Ended October 30, 1999: H.E.R. NCE Total
-------- ------- --------
Revenues, external customers $245,651 $43,204 $288,855
Intersegment revenues -- 3,463 3,463
Segment income 17,006 7,427 24,433
Capital expenditures 4,176 2,056 6,232
Three Months Ended October 31, 1998: H.E.R. NCE Total
-------- ------- --------
Revenues, external customers $254,248 $35,317 $289,565
Intersegment revenues 3,443 4,951 8,394
Segment income 13,826 7,299 21,125
Capital expenditures 4,626 1,225 5,851
6
Notes to Consolidated Financial Statements (continued)
A reconciliation of total segment revenues to consolidated revenues and total
segment income to total consolidated income before income taxes and minority
interest, for the three months ended October 30, 1999 and October 31, 1998 is as
follows (in thousands of dollars):
Oct. 30, 1999 Oct. 31, 1998
-------------- -------------
Revenues
- --------
Total segment revenues $ 292,318 $ 297,959
Elimination of intersegment revenue (3,463) (8,394)
--------- ---------
Consolidated revenues $ 288,855 $ 289,565
========= =========
Income Before Income Taxes and Minority Interest
- ------------------------------------------------
Total segment income for reportable segments $ 24,433 $ 21,125
Interest revenue 425 207
Interest expense (1,257) (2,770)
Repositioning and related charges -- (6,962)
Intersegment profit elimination (114) (50)
--------- ---------
Consolidated income before income taxes
and minority interest $ 23,487 $ 11,550
========= =========
The tables below present information about reported segments as of and for the
six months ended October 30, 1999 and October 31, 1998 (in thousands of
dollars):
Six Months Ended October 30, 1999: H.E.R. NCE Total
-------- ------- --------
Revenues, external customers $445,616 $ 69,596 $515,212
Intersegment revenues -- 5,649 5,649
Segment income 17,267 9,543 26,810
Total assets 447,178 185,697 632,875
Capital expenditures 8,118 2,867 10,985
Six Months Ended October 31, 1998: H.E.R. NCE Total
-------- ------- --------
Revenues, external customers $451,459 $ 57,339 $508,798
Intersegment revenues 3,478 6,848 10,326
Segment income 9,889 8,850 18,739
Total assets 551,487 177,718 729,205
Capital expenditures 6,465 2,397 8,862
7
Notes to Consolidated Financial Statements (continued)
A reconciliation of total segment revenues to consolidated revenues, total
segment income to total consolidated income before income taxes and minority
interest, and total segment assets to total consolidated assets as of and for
the six months ended October 30, 1999 and October 31, 1998 is as follows (in
thousands of dollars):
Oct. 30, 1999 Oct. 31, 1998
-------------- -------------
Revenues
- --------
Total segment revenues $ 520,861 $ 519,124
Revenue for sold operation (Sofsource) -- 2,692
Elimination of intersegment revenue (5,649) (10,375)
--------- ---------
Consolidated revenues $ 515,212 $ 511,441
========= =========
Income Before Income Taxes and Minority Interest
- ------------------------------------------------
Total segment income for reportable segments $ 26,810 $ 18,739
Operating loss for sold operation (Sofsource) -- (135)
Interest revenue 1,130 459
Interest expense (2,467) (5,375)
Repositioning and related charges -- (116,962)
Gain on sale of Sofsource subsidiary -- 31,000
Intersegment profit elimination (300) (70)
--------- ---------
Consolidated income (loss) before income taxes
and minority interest $ 25,173 $ (72,344)
========= =========
Assets
- ------
Total segment assets $ 632,875 $ 729,205
Elimination of intercompany receivables
and payables (62,531) (95,958)
--------- ---------
Total consolidated assets $ 570,344 $ 633,247
========= =========
6. A reconciliation of the weighted average shares used in the calculation of
basic and diluted shares is as follows (in thousands):
Three Months Ended Six Months Ended
------------------ ----------------
Oct. 30, Oct. 31, Oct. 30, Oct. 31,
1999 1998 1999 1998
------- ------- ------- -------
Weighted average shares during the
period-basic 29,851 31,583 30,278 31,695
Additional shares from assumed
exercise of stock options 338 88 314 158
------ ------ ------ ------
Weighted average shares adjusted
for assumed exercise of stock
options-diluted 30,189 31,671 30,592 31,853
====== ====== ====== ======
8
Handleman Company
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
Revenues for the second quarter ended October 30, 1999 were $288.9 million
compared to $289.6 million for the second quarter ended October 31, 1998.
Revenues last year included $14.1 million of sales of products (video, book and
software) and businesses (Sofsource and Argentina) exited pursuant to the
repositioning program announced and completed in fiscal 1999. Net income for
the second quarter of fiscal 2000 increased to $13.5 million or $.45 per share
from $6.1 million or $.19 per share for the second quarter last year. The
Company's second quarter results last year included pre-tax repositioning and
related charges of $7.0 million.
Revenues were $515.2 million for the first six months of fiscal 2000, compared
to $511.4 million for the first six months of fiscal 1999. Revenues last year
included $47.5 million of sales of products (video, book and software) and
businesses (Sofsource and Argentina) exited pursuant to the repositioning
program. Net income for the first six months of this year was $14.2 million or
$.46 per diluted share, compared to a net loss of $53.0 million or a loss of
$1.67 per share for the comparable six-month period last year. The Company's
results of operations for the first six months of last year included pre-tax
repositioning and related charges of $117.0 million and a pre-tax gain on the
sale of the Company's Sofsource subsidiary of $31.0 million.
The Company has two business segments: Handleman Entertainment Resources
("H.E.R.") encompasses the Company's music category management and distribution
operations, and North Coast Entertainment ("NCE") is responsible for the
Company's proprietary operations, which include music and video products, as
well as licensing operations. Handleman International (which encompasses music
category management and distribution operations in Mexico and Brazil), which was
reported as a separate segment for fiscal 1999, has been included within H.E.R.
for both this year and last year due to a change in H.E.R. responsibility for
the segment effective at the beginning of fiscal 2000.
H.E.R. net music sales for the second quarter ended October 30, 1999 were $245.6
million, compared to $243.4 million for the second quarter ended October 31,
1998. H.E.R. net music sales for the second quarter of last year included $12.6
million of net music sales to customers H.E.R. no longer services pursuant to
the repositioning program. H.E.R. net music sales for the first six months of
this year were $445.6 million, compared to $411.1 million for the comparable
period last year. H.E.R. net music sales for the first six months of last year
included $21.5 million of net music sales to customers no longer serviced
pursuant to the repositioning program.
H.E.R. net sales for the second quarter of last year included $14.3 million of
sales of products and businesses exited pursuant to the repositioning program.
H.E.R. net sales for the first six months of last year included $43.9 million of
sales of products and businesses exited pursuant to the repositioning program.
9
NCE net sales were $46.7 million for the second quarter of fiscal 2000, compared
to $40.3 million for the second quarter of fiscal 1999, a 16% increase. This
increase was attributable to improved sales across all business units. Net
sales for the six months ended October 30, 1999 increased 17% to $75.2 million
from $64.2 million for the six months ended October 31, 1998 (excluding sales at
the Sofsource subsidiary).
Direct product costs as a percentage of revenues was 73.8% for the second
quarter ended October 30, 1999, compared to 75.1% for the second quarter of last
year. This reduction in direct product costs as a percentage of revenues was
primarily attributable to the Company's NCE business segment, which reduced its
direct product costs as a percentage of revenues and increased its relative
percentage of consolidated sales. NCE realizes lower direct product costs as a
percentage of revenues than the overall consolidated percentage; accordingly, an
increase of NCE sales in the total sales mix positively impacts the consolidated
direct product costs percentage of revenues. In addition, the Company's direct
product costs as a percentage of revenues benefited from the absence of sales of
the exited video, book and software product lines which carried a higher direct
product costs as a percentage of revenues than the overall consolidated
percentage. Direct product costs as a percentage of revenues for the first six
months of this year was 74.2%, compared to 75.5% for the comparable six-month
period last year.
Consolidated selling, general and administrative ("SG&A") expenses were $51.5
million or 17.8% of revenues for the second quarter of fiscal 2000, compared to
$51.0 million or 17.6% of revenues for last year's second quarter. The increase
in SG&A expenses was attributable to increased project development expenses
within NCE. Consolidated SG&A expenses for the six months ended October 30,
1999 were $106.4 million or 20.7% of revenues, compared to $106.8 million or
20.9 % of revenues for the six months ended October 31, 1998.
Income before interest, income taxes, minority interest, repositioning and
related charges and gain on sale of subsidiary ("operating income") for the
second quarter of fiscal 2000 was $24.3 million, compared to $21.1 million for
the second quarter of fiscal 1999. The $3.2 million improvement in operating
income was primarily attributable to the year-over-year reduction in direct
product costs as a percentage of revenues as previously described. H.E.R.
operating income improved by 23% to $17.0 million for the second quarter of this
year, from $13.8 million for the second quarter of last year. NCE operating
income was $7.4 million for the second quarter of fiscal 2000, compared to $7.3
million for the comparable period last year. NCE operating income for the
second quarter of fiscal 2000 was negatively impacted by an increase in SG&A
expenses primarily attributable to project development expenses.
Operating income for the first six months of this year increased 43% to $26.5
million from $18.5 million for the first six months of last year. H.E.R.
operating income improved 73% to $17.3 million for the first six months of
fiscal 2000 from $9.9 million for the comparable prior year period. NCE
operating income increased 7% to $9.5 million for the first six months of this
year from $8.9 million for the first six months of last year (excluding the
Sofsource subsidiary operating loss of $.3 million).
10
Interest expense for the second quarter of fiscal 2000 was $.8 million, compared
to $2.6 million for the second quarter of fiscal 1999. Interest expense for the
six months ended October 30, 1999 decreased to $1.3 million from $4.9 million
for the six months ended October 31, 1998. The decrease in interest expense for
both the quarter and six-month period was attributable to lower borrowing
levels.
Accounts receivable increased to $267.4 million at October 30, 1999 from $218.0
million at May 1, 1999. This increase was primarily attributable to the
increased sales volume in the second quarter of this year, compared to the
fourth quarter of last year.
Merchandise inventories increased to $140.4 million at October 30, 1999 from
$102.6 million at May 1, 1999. This increase was primarily due to increased
inventory purchases in preparation for the upcoming holiday season.
The increase in property and equipment, net at October 30, 1999, compared to May
1, 1999 primarily resulted from building renovation costs at the Company's
corporate headquarters and systems development costs.
Other assets, net at October 30, 1999 were $82.1 million, compared to $64.9
million at May 1, 1999. This increase was mainly due to additional investments
in licenses at NCE.
Accounts payable at October 30, 1999 was $239.1 million, compared to $156.3
million at May 1, 1999. This increase primarily resulted from increased
inventory purchases in the second quarter of fiscal 2000, compared to the fourth
quarter of fiscal 1999 as mentioned above.
In connection with the repositioning program announced on June 2, 1998, the
Board of Directors approved a common stock repurchase program. During fiscal
2000, the Company purchased 2,115,000 shares at a cost of $28.0 million under
the repurchase program. Since the inception of this program through the date the
program expired on December 4, 1999, the Company repurchased 3,857,000 shares at
a cost of $49.0 million.
Year2000
In May 1997, the Company formed an internal team to study the information
system's issue commonly referred to as "Year2000." As a result, a project plan
was developed to address the Year2000 issue. The Company's Year2000 plan covers
the enterprise wide information technology systems. The Company's information
technology systems are comprised of mainframe applications, AS400 systems, PC
Client Server applications, PC desktop/LAN infrastructure, Telecomm/Voice
infrastructure, Embedded systems, Sales Force Automation and Stirling Douglas
Merchandising and Replenishment Application. The Company's information
technology systems play a vital role to support its business operations.
In December 1997, the Company's Chief Executive Officer issued the Company's
Year2000 policy. The Company's Chief Information Officer (CIO) is the Year2000
project sponsor. The Year2000 project management team meets with the CIO on a
weekly basis to report on project progress and discuss issues.
11
All Year2000 projects have been completed.
The Company's mainframe applications are a major part of its information
technology systems inventory. The Year2000 project incorporated the remediation
and testing of the Company's 4.1 million lines of code for mainframe
applications. The Company used the services of third-party consulting firms, in
conjunction with its own information technology staff, for the mainframe
applications Year2000 project. The Company completed the remediation and
testing of its entire mainframe application inventory by May 1, 1999.
The Company's mainframe data center is an outsourced operation. The Company
worked closely with its data center service provider to address the system
related Year2000 issues. System level Year2000 readiness status was achieved by
May 1, 1999.
The Company prepared the Year2000 remediation, upgrade and test plans to address
its AS400 Systems, PC Client Server applications, PC desktop/LAN server
infrastructure, Telecomm/Voice infrastructure, Embedded systems, Sales Force
Automation and Stirling Douglas Applications. As of the date of this Form 10-Q,
these projects have been completed and are in production.
As a part of the Year2000 project, the Company trained its information
technology staff on the Year2000 awareness and Year2000 remediation and testing
technologies, on an as needed basis.
The Year2000 issue can arise at any point in the Company's supply, processing,
distribution and financial chains. The Company surveyed its merchandise trading
partners to assess their general IT and EDI Year2000 readiness status. The
Company prepared plans for the Year2000 capability of its EDI systems. The
Company successfully completed the National Retail Federation's EDI test to
handle two position year dates. The Company tested Year2000 compliant EDI
transactions with certain of its merchandise trading partners.
The Company continues to refine its contingency plans intended to mitigate
possible disruptions in business operations that may result from the Year2000
issue. The contingency plans may include increasing inventory levels,
stockpiling packaging materials, securing alternative sources of supply,
adjusting facility schedules, manual workarounds, additional staffing and other
appropriate measures. These plans will continue to be evaluated and modified
throughout the Year2000 transition period as additional information becomes
available.
The Company has completed its Year2000 readiness plan for its non-IT systems.
Non-IT systems include security card systems, building access systems,
elevators, fax machines, copiers, security alarm systems, auxiliary power
generator systems, etc. The Company continues to survey its non-merchandising
trading partners for both IT and non-IT systems (data center service provider,
application support service providers, critical material suppliers, banks,
electricity and telecommunications service providers, etc.) for their Year2000
readiness status.
Because of the vast number of business systems used by the Company and the
significant number of key business partners, the Company could experience some
disruption in its
12
business due to the Year2000 issue. More specifically, because of the
interdependent nature of the business systems, the Company could be adversely
affected if utilities, private businesses and governmental entities with which
it does business or that provide essential services are not Year2000 ready.
Although it is not currently possible to quantify the most reasonably likely
worst case scenario, the possible consequences of the Company or key business
partners not being fully Year2000 ready in a timely manner include, among other
things, delays in the delivery of products, delays in the receipt of supplies,
invoice and collection errors, and inventory and supply obsolescence.
Consequently, the business and results of operations of the Company could be
adversely affected by a temporary inability of the Company to conduct its
business in the ordinary course for periods of time. However, the Company
believes that its Year2000 readiness program, including the contingency
planning, should significantly reduce the adverse effect, if any, of such
disruptions.
The total cost for the Year2000 project was $5.0 million. These costs were
expensed as incurred, and were financed through operating cash flow.
The Company has also replaced certain non-ready systems to meet Year2000
requirements. In July 1998, the Company launched an Oracle Financials
Implementation Project to replace its existing general ledger, fixed assets and
accounts receivables systems. The Company used third party consulting firms, in
conjunction with its own information technology staff, to implement the Oracle
Financials System. The Company has implemented the general ledger, fixed assets
and accounts receivable systems. Costs associated with new computer systems are
being capitalized, as appropriate, under current accounting standards.
Other non-Year2000 information system projects either have not been materially
delayed or impacted by the Company's Year2000 initiatives, or if delayed, such
delay does not have an adverse effect on the results of operations or financial
position.
Management recognized that not being Year2000 capable could result in material
financial risk. While management has completed all remaining planned work,
there can be no assurance that all systems will be capable by the Year 2000,
that the systems of other companies and government agencies on which the Company
relies will be converted in a timely manner, or that contingency planning will
be able to fully address all potential interruptions. Therefore, date-related
issues could cause delays in the Company's ability to ship its products, process
transactions, or otherwise conduct business in any of its markets.
* * * * * * * * * *
This document contains forward-looking statements that are not historical facts
and involve risk and uncertainties. Actual results, events and performance could
differ materially from those contemplated by these forward-looking statements,
including, without limitations, conditions in the music industry, continuation
of satisfactory relationships with existing customers and suppliers,
relationships with the Company's lenders, certain global and regional economic
conditions, risks associated with the state of the Company's Year2000 readiness,
as well as that of its vendors and customers, and other factors discussed in
this Form 10-Q and those detailed from time to time in the Company's other
filings with the Securities and Exchange Commission. The Company undertakes no
obligation to update any forward-looking statement to reflect events or
circumstances after the date of this document. Additional information that could
cause actual results to differ materially from any forward-looking statements
may be contained in the Company's Annual Report and Form 10-K.
13
PART II - OTHER INFORMATION
Item 4. An Annual Meeting of Shareholders of Handleman Company was held on
September 8,1999. One item was voted on at the Annual Meeting.
This item was the election of directors. The following individuals
were elected as directors of the Company with each receiving at
least 27,028,867 shares voted for election, while a maximum of
1,836,803 were withheld: Messrs. David Handleman and Richard H.
Cummings.
Item 6. Exhibits or Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
SIGNATURES: Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HANDLEMAN COMPANY
DATE: December 10, 1999 BY:/s/ Stephen Strome
--------------------- -------------------------------
STEPHEN STROME
President and
Chief Executive Officer
DATE: December 10, 1999 BY:/s/ Leonard A. Brams
--------------------- -------------------------------
LEONARD A. BRAMS
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
14